Monday, January 3, 2011

The party is not over in Australia

Mike Shedlock has declared the party to be over in Australia for about the fifth time.

He is dead right that the Australian economy is a party and that it will end.

He is wrong that it is over now.  The property market is more illiquid than usual.  It has got illiquid a few times (and essentially flat) and every time it has I have thought that we were in Wile-E-Coyote country.  (You know the type - the Coyote has run off the cliff - but he has not looked down - and only when he looks he starts to fall.)  It just never fell.

The beaches are crowded and people are still buying lots of $6 ice-cream cones.  You still meet plenty of people who are purchasing houses for more than can afford whilst driving his-and-hers BMWs.

I have thought the party was going to end for a while.  (Like Mike Shedlock I am wanting to run fast from this bubble.)  But early is wrong.

I have done very nicely with my offshore money.  I have managed to keep up with the Australian dollar and then some.  For that I am thankful.  It would have course been easier to just buy Aussie bonds.

Oh well...

12 comments:

Nicholas Mycroft said...

What signs would tell you the party is coming to an end? Or is it all about China?

gdr said...

Aussie--Credit Cards numbers(millions) :
2008 : 54.75
2009 : 59.81
2010 : 62.33
Credit Cards with DEBT function :
2008 : 36.02
2009 : 39.52
2010 : 43.16
Credit Cards with CREDIT function :
2008 : 19.41
2009 : 20.29
2010 : 22.06

Anonymous said...

John,
For us curious followers out there, when will you post the Nov and Dec investor client letters on your website?

Anonymous said...

Who knows what causes a slowdown - the cost of everything is going up - water, energy, rents, interest rates.

Maybe a slowdown in China will cause Aust to start to fall?

Anonymous said...

I think you're right that property will start to fall. Doesn't the RBA have a lot of room to drop rates though? What effect will that have? Also the govt would probably re introduce some housing incentives like the First Homeowners grant.

Peter said...

I don't necessarily agree with most of Mike's assertions about the Australian economy (I class his blog as a "financial conspiracy blog" rather than a real unbiased blog), but there is one trigger that clearly ends the party - a reversal in our terms of trade.

Australian house prices are a function of the terms of trade and demand for housing finance. These are coincident and not leading, so if you can form a crude forward estimate by taking current contract pricing (easier now that the big boys have gone to quarterly resets on iron ore contracts). The transmission mechanism for the rise in the terms of trade is fairly clear. Who doesn't know a tradesman that has gone to a mine to make ludicrous money for a year to buy a house? Couple this with some supply constraints and you have the elements of a rising market. Bubble it isn't though - the fundamentals (right now) support it.

Housing is a bad bet medium to long term, but in the meantime sideways house prices actually has quite a large effect on reducing debt to income ratios.

It isn't an impossible situation to defeat without a crash, but it obviously requires China to keep firing with at least the same ferocity and India to step up and collect some of the iron ore oversupply in 2013/2014. The 2011 resources (over?) investment story is one that worries me greatly, and it usually a pre-cursor to a crash in commodity pricing.

drpat said...

If rents are going up, and fast, how can that be anything other than supportive of house prices?

It may not be enough to completely counter other factors, but to list it as a reason that house prices leaves me confused.

Fungus FitzJuggler III said...

Looking at "Phil downunder" on TV shows that since June 2009 house prices in Oz may have decined 5-10% or not, but that those who bought from UK have recorded an impressive gain! All the prices were in sterling and that has dropped like a stone. As John says Bonds would be easier, but you can't live in a bond?

John Hempton said...

I am pretty sure this party will end in tears. But for the moment the only party that is over in Australia is the Ashes. (We lost them.)

And early is wrong. At least if you are an Australian and you took your cash offshore at 80c or less to the USD.

John

Anonymous said...

Hopefully the PARTY is not OVER in OZ. 2011 will be ALL about BONDS Baby!
Sovereign CDS and bond yield spreads. How much will these two measures of credit risk deviate in 2011? LIQUIDITY will be king in 2011 as the BANKS get more DESPERATE.

Anonymous said...

john

what do you think of steve keen?

Anonymous said...

I'm curious as to what potential triggers there may be. From an outside perspective the most likely trigger is China and commodities price falls.

And Australia's situation in that case uses the most simple lever: the AUD collapses in value as a commodity currency is expected to. Impact on homeowners is limited to unemployment, and the dollar's doing what it should to deal with that. This isn't saying there aren't mispricings (long-term) that will correct painfully, but it doesn't tell the financial conspiracy story Mish wants it to - it's just part of the normal cycle for Australia.

Part of the story with the US is that the current account balance is not correcting - at least in part due to Chinese currency actions. Periodic vicious corrections are normal for Australia (and other commodity-focussed economies).

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The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.